P Chidambaram’s move to allow 13 firms to import gold in May 2014 seems to be malafide. Why did Raghuram Rajan agree?
Former finance minister P Chidambaram’s decision to allow 13 trading houses to import gold in May 2014 under the now-defunct 80:20 scheme raises many questions. It also brings under scrutiny the role of the then Reserve Bank of India (RBI) governor Raghuram Rajan. Results of the May 2014 Lok Sabha election had been announced and there was no doubt that a new government under Narendra Modi would take over in no time. On his way out, what was the need for Chidambaram to clear a policy initiative by a government that was voted out lock, stock, and barrel? More surprising is how someone like Rajan, who was otherwise vocal about post-Modi political developments, closed his eyes to the dangers of such a decision!
First, the 80:20 scheme.
The 80:20 scheme is one that allowed imports of gold by an importer only if they exported 20 per cent of the gold brought into the country in value-added form. For example, if firm ABC imported 10 bars of gold initially, it could import further only if it had exported at least two bars in value-added form like jewellery. The scheme was introduced in July 2013 to rein in gold imports zoomed in, in May, to 165 tonnes – a monthly record – after global prices crashed. The United Progressive Alliance (UPA) government came up with this restriction on curbing gold imports as the current account deficit (CAD) rose alarmingly, leading to trade imbalance. The UPA government further tightened imports by raising the import duty to 10 per cent from 6 per cent. Not just that, importers had to produce records of purchases in the previous three years to buy gold from nominated agencies like State Trading Corporation or Metals and Minerals Trading Corporation or banks.
The impact of the 80:20 scheme was such that gold imports came to a halt. But there were other fallouts of the scheme. One, it led to increased smuggling of gold. In 2013, when the scheme was introduced, gold imports were 975 tonnes. But according to World Gold Council (WGC), an organisation of gold producers, nearly 200 tonnes of gold were smuggled into the country. Two, the regulation helped a few well-to-do and stocked-up traders. Most of them charged a premium ranging from $50-$100 an ounce. In some cases, the premium was $120. (In the Punjab National Bank scam, Chidambaram and his ministry officials have been alleged to have asked some select banks to charge a premium of less than $10 an ounce to their handpicked people.)
It now transpires that the Department of Revenue Intelligence (DRI) had opposed the 80:20 scheme saying it would result in money-laundering and round-tripping of black money. Be that as it may, returning to the May 2014 decision on his way out, Chidambaram’s motive is questionable.
This is because the move resulted in gold imports jumping 80 per cent in the third quarter of 2014 (July-September). The WGC in its review for the 2014 third quarter said:
In an otherwise quiet quarter, Indian jewellery was a highlight. Demand jumped 60% to 182.9t (Chart 1). This was the second highest Q3 on record (Q3 2008 pips it to first place, when demand jumped following a steep price decline).WGC Q3 2014 review
The organisation further said:
True, base effects flatter the year-on-year comparison. The third quarter of 2013 was decidedly weak as the introduction of complicated new measures to restrict gold imports and the subsequent sharp rise in local prices knocked demand. But this quarter, other more positive forces were also at play.WGC Q3 2014 review
The other positive factors were expectations of better governance by the Narendra Modi government. The council said the Modi government’s coming to power had led to the RBI allowing star trading houses to import gold, easily supply problems. Domestic premiums, too, dropped, it said. But these trading houses, including Mehul Choksi’s Gitanjali Gems that is in the eye of the PNB scam, hoarded gold and continued to charge high premiums.
The Indian Bullion and Jewellers’ Association wrote a letter to the RBI wondering why these private trading houses were allowed to import gold under the scheme, rather than nationalised banks. The association also charged the UPA government with not caring for the sustenance of the CAD and deliberately yielding to cronies “having achieved the targetted current account deficit (CAD) level”.
Chidambaram’s decision, per se, looks to be malafide. Was his decision made to clear any suspicion on his original move to impose restrictions? The restrictions led to rise in premiums for gold – certainly benefiting politicians – and smuggling too.
Data of gold imports during June-November 2014 show that some of the trading houses that were given permission to import gold, brought in a huge amount of gold. Compared with the same period in 2013, there was a 309 per cent rise in gold imports. According to Hindustan Times, between 1 June and 30 November 2014, gold imports increased to 553 tonnes with 60 per cent of them accounted for by the 13 trading houses!
What actually happened because of Chidambaram’s decision in May 2014 was that these trading houses availed of funds from public sector banks, imported gold, charged a premium, and made huge profits. These trading house had enough clout to get their things done.
If this is one part of the problem posed by Chidambaram’s May 2014 decision, there is another critical issue to be looked at. For unscrupulous elements, gold has always been the source to legalise their illegally earned money. The decision to allow more trading houses has helped those who were part of the UPA government and people close to it to resort to such methods of ensuring safety of their “hard-earned money”. (Remember, when the Modi government announced demonetisation of Rs 500 and Rs 1,000 notes, demand for gold jumped with those with unaccounted cash choosing to buy the yellow metal and save themselves.)
The issue here now is: How fair was Chidambaram in coming up with such an order when his government had been voted out? What was the motive for the move? Was it to cause an imbalance of trade? It wouldn’t be, since there are smart Johnnys in the government who could have helped tide over any crisis, as seen with the scrapping of the scheme itself in November. Then, obviously, the move had other objectives. The prime one, it is suspected, is to help himself and his friends to save their “hard-earned” money. And by choosing the favoured 13, there would have been other pecuniary benefits derived too!
There is another reason to question Chidambaram’s motive. Why did he come up with such an order on 15 May when the UPA government had lost the election? If his intentions were genuine, he could have done it before the election schedule was announced. If he was worried about higher premiums or gold supply, he could have acted soon after the WGC came out with its data on gold for 2013. More curious is how the order is put out by the RBI six days later.
The Narendra Modi government now has to move in swiftly instead of making statements about Chidambaram’s misdeeds. A high-level enquiry that will include those with a financial background, will be the order of the day. And Rajan, too, will have to answer why he passed this order when he knew it was best left to the incoming government. Was he hand-in-glove with the government with respect to this move? Why should a man, who is claimed to be one of integrity, be part of such a sinister design?
Many questions beg clear answers that are only with Messrs Chidambaram and Rajan. This is a move most foul.